Since President Obama seems intent on sinking his administration with insane Hooverite attempts to bailout hopelessly bankrupt financial institutions whilst ignoring the ongoing and accelerating collapse of the physical economy, I thought it relevant to inform my readers as to the precise value of these type of firms.
Hint: It's not much.
So, basically, you have three types of economic activity: those that add value or wealth to an economy and society, those that don't but are socially necessary, and those that actually destroy it. Ideally, banking should fall in the middle category; it is a socially necessary service, but it is not productive, and as such, it adds no wealth or value in and of itself. While productive activities, at least at some level, will continue even if all the banks in the world were to suddenly vanish, without production, banking would immediately cease to have any purpose. How could it? It does not involve the creation of any physical thing, and fiat money certainly doesn't count.
So we see the absurdity of bailing out non-productive "financial services" companies: how can we save the banks but kill off our industries? Forget about the money, where's the stuff the going come from? Answer: it's not. There can be no dispute of this: what is not produced cannot be consumed, because it doesn't fucking exist. Where does Larry Summers think his Ho-Ho's and chicken-fried steak come from, anyways?
OK, so some of you might still be too enamored with Obama to believe me. Let's work through an example to see if you're right and I'm wrong.
Consider an economy with 4 sectors - agriculture (A), mining (N), manufacturing (M), and banking (B) - plus a public sector which, among other things, insures bank deposits. Suppose each of these sectors has 10 firms with equal output, and that the total wealth/accumulated value of the economy is W. Each year, W increases by aggregate output (O) minus consumption (C) and capital depreciation (D). So, for the anticipated output this year, we have:
AND
Let us further suppose that the agriculture sector is hit with some natural disaster, destroying the total output of 2 of the ag firms. The loss (L) is therefore:
And the lower level of agricultural output (A') from the disaster can then be computed as:
Thus, we find the new level of output (O') to be:
It then follows that the new level of wealth (W') is:
The really important thing, which Monetarist, Austrian School, and Keynesian pseudo-economists miss, is that we must check our model against observable reality. Since people obviously need food to survive, it's fair to say that A has a non-zero value. Thus, our model here is an accurate, if crude, depiction of the events described.
Now, let's assume that, rather than a natural disaster, two banks close down for whatever reason - a bank run, say. Remember though - deposits are insured, so money supply is immaterial. What is the loss in wealth due to the two banks going bust? Well, let's run through the equations again. The loss (L) is:
The new level of output from the banking sector is:
So we figure the new level of economic output as:
And the new, lower level of wealth:
So, that's it, right? Well, not quite.
Remember, no depositors lost anything, so production is not disrupted; the depositors at the bankrupt banks simply switched banks, effectively. No physical capital or property was destroyed; in reality, the productive capacity of the economy is unchanged. In fact, as it is implied that the bankrupt banks were incompetent or criminal, very likely the productive capacity of the economy is improved, as the resources consumed by the corrupt banks are now freed for productive endeavors. In that case:
But even in the worst case, the total output of the banking sector remains unchanged, as does accumulated value (W), meaning that B' = B, and W' = W. How is that possible? It is only possible if the loss in value (L) is actually zero. But how could L be zero? Remember:
So, L can only be zero if B was zero originally! Whereas L changes based on the magnitude of the natural disaster in the agricultural sector, you could say 1 bank was closed or 9, and L will still be zero, because the real, physical wealth of the society is unchanged in any case.
It is therefore a tautology that banking, and the financial sector generally, adds NO VALUE WHATSOEVER TO AN ECONOMY. It is an indispensable service to be sure - but it adds no value. It adds no value because it is not productive.
Now, that's of course assuming that the banking sector is performing only the basic physical functions necessary to coordinate production. Financial speculation, which isn't even a socially necessary service, let alone a productive activity, doesn't even have a value of zero.
It takes resources to enable speculation; moreover, speculators, if successful, pocket a nice profit, but if they go bust, they just file for bankruptcy, and that's that. Even if some of their profits which were converted into physical property are discharged in bankruptcy liquidation, society as a whole is still left footing the bulk of their bill. It is thus also a tautology that the function of speculation is one which is not only wholly unproductive, but parasitic and exploitative. Accordingly, speculation can only be a drag on an economy over the long run, and it can only destroy wealth - it can never produce it.
Despite whatever sophistries the Friedmanites, Behaviorists, or Austrians manage to concoct, nothing will ever change these facts. Financial speculation is a way for morally degenerate parasites to siphon off the fruits of the labor of the productive, period. It should not be regulated at all - it should be banned outright. Why on earth would we regulate, or even worse, bailout, theft?
And who the hell would defend it, even as they're being robbed in broad daylight? Well, that's what the peasant mentality is all about. The broken spirits of the pathologically passive have the Stockholm Syndrome of political economy - theirs is not the most sane state of mind, in other words.
However, it is treatable, and without much pain. Simply recite this at least twice a day:
My fellow Americans, ask not when confidence on Wall Street will be restored, demand your government use its power to restart physical production!
And then call your family economist in two weeks. As to production of what, and by whom - more on that next time.